My recent reads include The Big Short by Michael Lewis who wrote Liar’s Poker and The Blind Side; and Reckless Endangerment by Gretchen Morgenson and Joshua Rosner. These works lay the frame work for how we arrived at the brink of the second great depression in the fall of 2008. Both books help explain why the housing recovery, on a macro basis, will take several more years to obtain a firm footing. Unfortunately, neither tries to analyze long term demand as a function of population and income levels with the current supply. Check back with me for more on that question.
The general premise of these books is that the politics of Washington and the greed of Fannie Mae and Wall Street were a toxic mix that led to the predicament we find ourselves in still today. The housing industry was overbuilt in a massive way for buyers that were not qualified. Easy money and liar loans became the standard. Wall Street’s lack of morals, and pure political graft kept our legislatures from doing their job. This kept the money flowing.
While I was working at Citicorp, now Citigroup, back in the early to mid-1990s I was on the front end of the commercial real estate mortgage securitization business. The securitization of loans had started several years earlier in the residential mortgage industry. I still believe that securitization in general is good for the mortgage industry. It allows the efficient flow of capital thereby lowering borrowing costs. Today, we need to take care not to throw the baby out with the bath water through overreaction to the current problems as the we navigate the ground rules for the coming decade.
Selective sub-markets are already coming out of the slump. Our company projects that there are about two more years of a general over supply of housing stock nation wide. After that point, the housing supply will be less than the long term demand. And, there may still be an over supply of homes available for sale from foreclosures and early investors cashing out at higher prices. But, we anticipate this will mark the beginning of a macro shift. This should be the start of above average price appreciation as home prices climb back to a level that represents the historical relationship between the cost of a new home vs. the price of an older home. Remember, with each year that passes, the “existing new homes” built in 2000-2006 are aging. Not only do they suffer from physical wear and tear, but from function and style changes. Every year that passes magnifies these differences. As this differential increases, the demand and price that newer homes command will increase. This will by default increase the prices of the substitute product, the older existing home.
In the meantime we look for niche markets, customers and products to differentiate ourselves and to uniquely deliver a value proposition. Call today to hear how we can help with your real estate investment.